After midterm election, focus on the ‘healthy’ 30%-plus correction headed for stocks

Election Day is finally here, and investors should be ready, given that barely a stone has been left unturned with regards to potential outcomes.

While history shows midterms haven’t really carried much weight, at least in the immediate term, “given amount of controversy we have around this government, these elections for the first time could bring some dramatic movement in the financial markets,” says Naeem Aslam, chief market analyst at Think Markets U.K.

The most likely outcome appears to be that Republicans will keep the Senate and Dems will win the house, causing gridlock. That won’t upset markets too much given they’ve had plenty of experience with political infighting. A less likely possibility would usher in a blue wave—Dems win Senate and House—causing lots of headaches for POTUS. Behind door number 3, another not so likely outcome, Republican sweep both houses.

But those playbooks may not matter much, according to our call of the day from Joel Kruger, currency strategist at LMAX Exchange, who sees a hefty selloff coming no matter what the result.

“Ultimately…i think we need to defer to the longer-term cycle and where things look at this stage in the game now that the economy is getting off central-bank proponomics and has to stand on its own two feet. This leads me to believe whatever the outcome…the market will find a reason to be selling risk (selling stocks) to allow for what has been a long overdue correction,” says Kruger, in emailed comments.

🤔 It's clear we could see volatility from the #USmidterms. What's unclear to me however is any certainty one might have about what any particular result might do to financial markets.

And given the one-way direction for stocks since 2009, he says investors may just want to redefine the traditional thinking around bear markets.

“I think we need to throw out the 20% bear market thing and consider the stock market could easily drop +30% and would look like a healthy correction within a strong uptrend. That’s a pullback to 2015 high territory…not so long ago considering,” he says.

Such selling would see a resumption of October’s volatile action, says Kruger. Even with a 6% drop in the current quarter, and some pretty wild days last month, the S&P 500 is still up 2.4% year-to-date, so barely even a bloody nose where pullbacks are concerned.

He sees this larger pullback headed our way between now and the second half of 2019, giving investors time to think about hedging their risk—moving to cash, rotating into bonds, options action.

“Or [if you are locked in] just sit and know that it will happen and not to panic at hearing 30% as it is a lot less intense when taken in context of the entire move and this grand monetary policy experiment,” says Kruger

The chart

Our chart of the day offers one more look at elections, history and the S&P 500. The chart comes from Tweeter @Oddstats, who lays out a week’s action for the index over the 10 most recent midterms:

Monday’s 0.6% gain for the S&P looks to be right in line with that chart that sees a median 0.8% rise for that day. And look for an average win of 0.7% when election week is over, if that historical mean holds up.

Amazon
AMZN, -0.16%
reportedly is near a deal to put its second headquarters between Long Island City in Queens, New York and Crystal City in Arlington, Va. Meanwhile, the Saudis are protesting WaPo’s coverage of the death of journalist Jamal Khashoggi by boycotting Amazon.

The quote

Getty Images

On the campaign trail in Fort Wayne, IN

“The Democrat agenda will deliver a socialist nightmare.”—That was POTUS at a rally in Fort Wayne, Ind. late Monday, his last midterm rally stop. He added that the GOP’s agenda is “delivering the American dream. Optimism.”

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